Sri Lanka to finalise IMF Staff-Level Deal this week

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Sri Lankan Government officials yesterday (27) told Finance Today that they have ready to finalise the staff-level agreement with the visiting International Monetary Fund (IMF) officials in coming days.

They said, the two sides would reach an agreement on the macroeconomic targets to be achieved by Sri Lanka over the next ten years (2023-2032) on a medium and long term basis.

Once a staff-level agreement is reached (likely in early July), the next stage will be to develop a comprehensive debt restructuring plan for discussions with creditors.

Like other IMF   Extended Fund Arrangement (EFF) -supported economic programmes, Sri Lanka’s proposed programme is aims to stabilise the debt ridden, cash-strapped economy by ensuring the   fiscal and debt sustainability. It will also expand the coverage of social assistance programmes to protect the vulnerable group of the community, promote a transparent management of public resources, and it will also lay foundations for sustainable and inclusive growth.

Continued improvement in public financial management and advances in transparency and anti-corruption would strengthen efficiency, governance and accountability of the public sector were also the main factors to concern during this programme.

The expected staff-level agreement on comprehensive economic policies could be supported by a 36-month EFF with access requested for a minimum SDR 2,173.9 million (equivalent to circa USD 3 billion).

IMF Executive Board approval of the EFF and access to the USD 3 billion in financing is, however, unlikely before significant progress towards an agreement with all external creditors is reached.

In order for the planned debt restructuring programme to be successful, Sri Lanka must have to fulfil the IMF’s debt sustainability analysis (DSA) targets which include the significant reduction of the external debt stock via principal “haircuts”, coupon reductions and maturity extension.

Accordingly, the current nation’s debt to GDP ratio has risen to about 137 per cent.

As per the IMF, this high debt to GDP ratio needs to be reduced to below 100 per cent, in short to medium term, in order for Sri Lanka to reach the required debt sustainability levels.

In addition over the next ten years (2023-2032) this debt to GDP ratio figure will have to be reduced to between 60-80 per cent. In order to achieve this debt sustainability, the debt restructuring programme currently being implemented by Lazard with financial advice must be successful.

Meanwhile, Hamilton Reserve Bank Ltd., which holds more than USD 250 million of Sri Lanka’s 5.875 per cent International Sovereign Bonds due 25 July, filed the suit in a New York Federal Court seeking full payment of principal and interest. This case is the first court case to be reported since the announcement of Sri Lanka’s Debt Restructuring Programme.

It is clear that this court case will have an impact on the upcoming debt restructuring process. However, when Finance Today inquired from international legal experts; the response was that there were a number of shortcomings in the way the case was filed. It appears that the relevant party has purchased these bonds from the secondary bond market on a heavy discount basis.

By Ishara Gamage